What you need to know about pensions – Richard Lishman

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  Posted by: The Probe      8th April 2019

 

 

 

 

 

Contrary to belief, pensions are something that everyone, not just the elderly, should know more about. Unfortunately, many people tend to ignore their pension and simply “go with the flow” rather than really delving into what these plans mean for them. However, this is a mistake and by getting to know more about your pension, how it affects you and where your money is going, you can soon see what you can do to better prepare for the future.

So, what is a pension?

Simply put, a personal pension is a tax-free sum of money that can be paid into by you, your employer and sometimes the government in order to ensure you have money to live off of when you reach retirement.

There are many different types of pensions, including workplace pensions, personal pensions, stakeholder pensions and more. These are usually defined as either private or state pensions, with state pensions offering limited financial support in old age, whilst private pensions allow individuals to build much larger funds for retirement. For the majority of people some of these different pension schemes won’t be accessible (e.g. small self-administered pension schemes), however they are useful to know about, especially if you own your own business as people in these situations can benefit from their bespoke nature.

How do pensions work?

Most pensions are funded by individuals paying in a portion of their monthly salary each pay date until they choose to retire. If you’ve opted into a workplace pension, your employer will contribute a certain amount of money too. For example, in a typical defined contribution pension scheme, a pay in of £40 per month by you would be joined by a £30 sum from your employer. With tax relief from the government earning you an extra £10, this means your total contribution to your pension pot would be £80 for the monthl

But what is tax relief? As pensions are tax-free it means that the government will add to your monthly contributions if you pay income tax. Even if you don’t pay income tax you may receive monetary contributions from the government if your pension scheme uses ‘relief at source’ as this means that your pension supplier will add tax relief to your pension at a basic rate.

How do pensions affect my income?

Perhaps the most important thing to remember about pensions is that they do have a significant affect on your monthly income. Effectively a percentage of your wage will be invested and unable to be spent, and this will depend on your yearly income and how much income tax you currently pay. There are several different salary brackets for this.

Those who earn up to £11,850 do not have to pay income tax and fall under the Personal Allowance band. Upwards from that, the Basic Rate band includes anybody who earns £11,851 – £46,350 and this section of earners will be taxed 20%. One step up from this is the Higher Rate band that encapsulates anyone earning £46,351 – £150,000 per annum – these individuals are subject to income tax of 40%. Above this band this is an Additional Rate, and anyone who earns over £150,001 per year is taxed 45%. These bands are different in Scotland.

As such, it’s important to budget accordingly in order to ensure that you can continue paying into your pension without affecting your quality of life – especially if a job promotion or new career means you will be moving between bands. This will also allow you to pay more than the minimum amount into your pension, if you deem it necessary. This is a wise idea as the more you pay in, the larger your pot will be when retirement age comes around.

When can I access my pension?

Since the 2014 Budget many pension schemes allow people to access them once they reach the age of 55. This means that you will be able to access the funds that you have saved up during your years of paying in, and start to use them as a boost in income. However, since 2010 state pensions have been faced with some radical changes.

Until 2018, state pensions allowed people to take them at the age of 65, however this is currently under review. Depending on the year of your birth and your gender, pension ages have now increased, and these usually vary between 65 and 68 years old.

Changes to pensions for 2018

The 2018 tax year brought a number of changes to pensions that people should be aware of. The first is that state pensions have increased by 3%. This means that people who qualify for the full state pension will receive £164.35 each week and an annual income of £8,546.20. This is good news for people who are reliant on this money as it means they will have more capital to work with on a weekly basis.

Secondly, the Lifetime Pension Allowance has increased. Though people can still only pay £40,000 into their private pension per annum, there is now a higher limit on the total amount you can save tax free, and you can now invest £1,030,000 in a lifetime. Any money saved in pension plans that exceed this are subject to extra tax charges.

Thirdly, auto-enrolment schemes have increased the minimum percentage that workers have to pay into their pensions if they have a workplace pension scheme. Contributions have automatically risen from a minimum of 1% to 3%. This means that for anyone paying the smallest 1% before, they will now have to triple the amount they put into their pension fund.

Employers too have seen their contributions increase, and they have now got to provide 2%. This is a good change for people who find it difficult to contribute extra into their pension scheme, as employers need to provide more money which means you will have more capital available in the future.

These figures are set to rise again in the coming 2019 tax year, and minimum employee contributions will possibly rise to 5% with employers adding a further 3%. This will hopefully help people avoid retirement shortfall.

Prepare for the future

Pensions are an important part of planning for the future. By understanding how they work, what you contribute and how they are changing, you can set yourself up for a comfortable retirement with ease.

 

For more information please call 0845 345 5060, 0754 DENTIST, email info@money4dentists.comor visit www.money4dentists.com

 

 


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